(Bloomberg) -- US equities are at risk from a further unwinding of yen-funded carry trades if the Federal Reserve delivers a jumbo interest-rate cut this month, according to Morgan Stanley’s Michael Wilson.

The strategist — who until May counted among Wall Street’s biggest stock bears — said that an initial cut of more than 25 basis points could support the yen. This would fuel the incentive for Japanese currency traders to pull out of US assets after domestic rates moved higher, repeating the pattern that roiled global markets last month.

“The yen carry-trade unwind may still be a risk factor behind the scenes,” Wilson wrote in a note. “A quick drop in US front-end rates could cause the yen to strengthen further, thus eliciting an adverse reaction in US risk assets.”

The rally in US stocks has stumbled since mid-July due to growing worries that the economy is heading for a hard landing. The yen also surged after the Bank of Japan hiked rates in July, leading to billions of dollars worth of the carry trade being unwound.

Shortly after, JPMorgan Chase & Co. strategists said three quarters of that trade had been removed.

The benchmark S&P 500 sold off again last week as data suggested a cooling labor market. Traders are fully pricing in rate cuts of more than 100 basis points from the Fed by the end of the year, according to swaps data.

Wilson — who correctly predicted the summer’s decline in stocks — said bond markets are already reflecting that the central bank has waited too long to ease policy.

He doesn’t expect a rally in stocks “until the bond market starts to believe the Fed is no longer behind the curve, growth data reverses course and improves materially or additional policy stimulus is introduced,” Wilson said.

The strategist expects volatility to remain elevated in the run-up to the Fed’s meeting next week.

--With assistance from Michael Msika.